In late October 2007, as the financial markets were starting to come unglued, a Goldman Sachs trader, Jonathan M. Egol, received very good news. At 37, he was named a managing director at the firm.
Mr. Egol, a Princeton graduate, had risen to prominence inside the bank by creating mortgage-related securities, named Abacus, that were at first intended to protect Goldman from investment losses if the housing market collapsed. As the market soured, Goldman created even more of these securities, enabling it to pocket huge profits.
Goldman’s own clients who bought them, however, were less fortunate.
Pension funds and insurance companies lost billions of dollars on securities that they believed were solid investments, according to former Goldman employees with direct knowledge of the deals who asked not to be identified because they have confidentiality agreements with the firm.
Fascinating article. It reminds me of what happened in Lloyds of London in the early ’80’s when a few underwriters created syndicates to reinsure asbestosis claims, which were then targetted at new green investors or ‘names’. Other more experienced syndicates then laid off their asbestos claim long tail risk into these new syndicates, and it wasn’t long before the new vehicles had concentrated risk dangerously, and the asbestosis claims came in exponentially. With unlimited liability the names quickly received demands from Lloyds to settle liabilities for enormous sums. It turned out those in the know had known the risks for years. The result was that Lloyds had to, as a market, create as scheme to limit the exposure of these new investors who had been taken for a ride. It helped those who hadn’t already paid out or gone bankrupt.
Whereas a basic investment principle is to spread risk, CDO’s were designed to concentrate risk, in this case in low grade mortgage debt rather than asbestosis claims. Arguably the debt packaged was always liable to default, given to whom and on what basis the mortgages were originally granted. The downturn knocked these mortgages out along with more solid and prudently granted mortgages and the claims [as in the case of Lloyds] accelerated exponentially.
It is an old fraud, repackaged in a complex form so that no one, including the rating agencies really understood it. You collect all your rubbish investments and sell it off to some mug. In this case the use of Abacus etc while still selling the CDOs is the evidence of the mens rea for the crime. It is called gaining a monetary gain by deception.
We bought in as well. The British taxpayer spent enormous sums bailing out our banks which were mug enough to buy such ‘investments’.
“Sheep are for shearing”, apparently.
To paraphrase from Alan Teale (insurance fraudster how invented a scheme to allow insurers to “rent” securities in order to increase their assets): “There is money in confusion (of complexity). All you have to know is how to manage it.” Alan specialized in complex schemes designed to confuse the investor and regulator, but at the end of the day his assets were worth nothing having only the illusion of value. Simplicity would have revealed this.
The moral: Complexity is a great vehicle to hide fraud.
Pretty sickening stuff. Of course, greed is nothing new. It’s one of the deadly vices that humanity has been battling since the Fall in the Garden. But this kind of extreme, out of control greed isn’t just sinful; it turns out to be bad business too. As with other big scandals involving fraud (Enron’s bogus accounting, Madoff’s ponzi scheme, etc.), when there are millions of investors who get burned, everybody loses. Even the temporary winners at Goldman Sachs, whose short-term gains end up costing them big time.
Sort of reminds me of the warning in 1 Tim. 6. “The love of money is the root of all evil,” and those who grave it end up in disaster, always in some kind of spiritual shipwreck, and often in some sort of temporal ruin in this life as well. But the real tragedy is how many other people’s lives are severely harmed in the process. And with a case like this, the number of innocent victims numbers in the millions.
David Handy+
Oops, I meant those who CRAVE it (money).
David Handy+
So, Goldman took its customers to the cleaners. Why would anyone now deal with Goldman?